UCLA Anderson Forecast/Ziman Center for Real Estate 6/20/12 Housing Forecast Keynote Address
"Housing and Real Estate Markets: Whither California?"
By William A. Witte, President, Related California
Good morning. I am pleased and honored to speak to you today. Although the challenges of getting to Westwood from the recesses of Orange County have limited my involvement with the Ziman Center, I follow their research closely and am always interested to hear Stuart Gabriel's latest pronouncements. The presentations we have just heard should give us all a lot to think about in terms of where the economy is and where it might be headed. But I'm going to talk to you from my perspective as a developer active in both northern and southern California, and whose financial partner, the Related Companies in New York, is one of the nation's largest privately held real estate companies and almost certainly its most diverse. Today, the combined Related Companies have over $15 billion in assets and another $15-$20 billion in some stage of development.
As a developer in California, I live in two different worlds. On one side of our business, we are one of the most active developers of affordable rental housing in California, utilizing the federal low income housing tax credit program and what, until recently, was an array of state and local programs to develop and acquire and rehabilitate apartments for low- and moderate income households. We have over 60 projects in 20 cities throughout the state, including all the major cities, that range in size from 26 units in the heart of beautiful downtown Laguna Beach to a 700 unit acquisition and rehabilitation of an old HUD-insured project in San Jose. We have built over 1,600 units of affordable senior housing; redeveloped five obsolete public housing sites, in Los Angeles, San Francisco and Oakland, into new mixed income communities; created a model for "intergenerational housing," in which we have developed three projects that combine housing for seniors and families, with shared facilities, on a single site; and we recently completed our first project, in East Hollywood, providing permanent supportive housing for the homeless.
In the other "world," we develop large scale, urban residential and mixed use projects that draw on our company's experience as the largest developer in New York City. These include The Century, a 140 unit, 40 story condominium tower in Century City which is arguably the most luxurious condominium project on the west coast; The Paramount, a 40-story, 487 unit apartment tower in downtown San Francisco that has been the market leader in rents since it opened in 2001; two apartment projects in downtown LA's Little Tokyo neighborhood; and, of course, the Grand Avenue project near Disney Concert Hall in downtown LA, which has been on hold but on which there is now significant progress, which I will describe a bit later.
In some cases, these two worlds overlap. As many of you probably know, we started construction in January on The Village at Santa Monica, a 3 acre site on Ocean Boulevard leased from the City that will include 158 luxury condominiums in two buildings, a third building including 160 affordable apartments, and 20,000 square feet of retail space. And all of our market rate rental developments, including most in Manhattan, are financed with tax exempt bonds, so 20% of the units must remain affordable. In 2006, Related had two projects honored by the Urban Land Institute with its prestigious national Award of Excellence: Time Warner Center, the iconic $1.6 billion mixed use development across from Central Park on Manhattan's West Side, and Pueblo del Sol, the redevelopment of the troubled Aliso Village public housing project in LA's Boyle Heights into a vibrant community of over 450 apartments and homes that we co-developed with McCormack Baron Salazar. Two worlds, indeed.
But I like to think these experiences have given me a unique perspective on real estate in California, not only on different markets but on the role public policies play in helping, or perhaps more frequently hindering, rational development in the state. And it is that subject I'd like to address with you today. Where are we today? Where are we headed? And, most importantly, what steps might be taken to improve the climate for development in California to bolster the State's economy while responding to the needs of a still-growing population?
HOUSING MARKETS IN 2012
In preparing for this speech, I reviewed the avalanche of data sent to me, usually free of charge, over the internet. But I also talked to 10 or 15 friends of mine who are active leaders in homebuilding, apartment development, investment and finance in California and asked them the same questions I'm addressing today. Where do you see housing markets heading in California over the next 5-10 years, and why? What steps should be taken, by local, state or the federal government, to help address the State's housing needs and investment climate?
Before launching in to any predictions, I'd like to explore the factors that weigh most heavily on California's housing markets in 2012. Note that I used the plural "markets;" there are at least two Californias: Coastal California, which for the most part is in the process of recovering from the recession and, in a few spots like San Francisco and Silicon Valley, and parts of West Los Angeles/Santa Monica, and Inland California, which is still overbuilt and facing an uncertain future.
The job market: As we have heard, the job market continues to improve in California, albeit at a modest pace, and the unemployment rate is still well above the national average. Digging deeper, however, one finds that the unemployment rate for college graduates is under 5 % in most markets, but over 12% for those with just a high school degree and over 15% for those without a high school degree. Given the widely publicized challenges, budgetary and otherwise, facing the UC, Cal State and Community College systems, that should be raising red flags for our policymakers and indeed for the business community. California continues to be a leader in the knowledge based economy, and in tourism and entertainment. As a result, there is job growth at the upper end of the income spectrum and at the lower end, but the middle continues to suffer. Employment in the public sector has begun what I believe will be a long and steady decline, as ALL levels of government are forced to retrench, and employment in the construction industry and related trades, on which California was dependent to an unhealthy degree in the last cycle, is still way below pre-recession levels.
The foreclosure crisis: At a recent affordable housing conference I attended, there was much talk and gnashing of teeth about the foreclosure problem, and why affordable housing programs need to be deployed to help solve it. I completely disagree. There is a massive amount of capital, much of it from private equity funds, poised to invest in buying and renting foreclosed homes. According to a recent article in Bloomberg, over $6 billion has been raised, but less than $2 billion spent. In reality, the number of foreclosed homes has dropped in most markets, bulk sales have been slow to materialize, and prices have begun to recover in some of the hardest hit markets, like Phoenix and South Florida. In addition, banks, prodded by the government, have begun to try to accommodate borrowers. My friend Mike Meyer, formerly the head real estate partner for Kenneth Leventhal in Orange County, who now runs a small fund active in the Inland Empire, told me that in the last three months, cap rates in their market have dropped from 8% to 6%, effectively raising prices by 25%. Because of all this activity, the distressed or "shadow" inventory is likely to be burned through in the next 18-24 months, resulting in a market price increase of at least 10%. In inland communities closer to jobs and transit, like Ontario, the first signs of new construction could emerge. But in exurban districts like Indio, in the Coachella Valley, a full recovery is likely years away.
Interest rates: As the press, which helped spook potential homebuyers by relentlessly flogging the downward spiral in home prices, starts to trumpet "the end of distress" and the return of multiple offers on homes in desirable locations, those buyers with reliable employment and and some down payment capacity will quickly return to the market. There is considerable evidence that this is already occurring, again in Coastal California. At the high end, Related has closed nearly $60 million in sales at our Century high rise condominium in 2012. And my friend Larry Webb's New Home Company has made 42 sales in six weeks, at an average sales price of $1.2- $1.3 million, at its Lambert Ranch development in Irvine. The lower end has been slower to move, principally because prospective home buyers with less than perfect credit continue to have difficulty qualifying for loans.
Demographics: It has become an article of faith in the apartment industry that demographics are driving rental demand and will continue to do so for the foreseeable future. This argument is fundamentally accurate.
- California's population is projected to increase by approximately 400,000 annually through 2025. Although there is evidence that existing residents continue to leave for other parts of the country, legal immigration (which I believe will slowly increase over the next decade) and high birth rates in California's immigrant communities, will result in a net increase. Among immigrants, 75% to 85% typically rent, at least initially.
- Between 1995 and 2005, between 5 and 7 million renters nationally became homeowners. Since then, especially in the past four years, that trend has reversed, and approximately 3.5 million of those owners have become renters again.
- The population of 18- to 35-year olds, which is the core of rental demand, is at its highest point in decades. I know: I have three kids in that cohort....
- As demand has increased dramatically, new supply has dropped to historic lows. Over the past three years, new construction has averaged about 1/3 the level of the previous 15.
The investment community has taken notice. Apartment sales more than doubled from 2010 to 2011, and 2012 transaction volume to date is ahead of 2011.
As in the for sale market, low interest rates have been a major factor in this surge, and have fueled a major uptick in values. Examples abound:
- Last year, we sold our two apartment properties in Little Tokyo to at prices equivalent to a sub-4% cap rate on current NOI.
- In the last year, we have also sold two of our older tax credit properties at cap rates just over 6%, even with 55 year restrictions on the below market rents.
- Most new construction apartment projects in California, which are clustered in the San Diego, Los Angeles/Orange County, and San Francisco Bay areas, are hoping to achieve a 6 cap at stabilization and many, especially in the hottest submarkets, are more likely to achieve a 5 or 5.5, as land and construction costs continue to rise. If anyone shows you a pro forma with a stabilized return at 7 or greater, call me: I have a bridge to sell you.
One note of caution: Although their role in the for sale housing markets is far better known, the GSE's (Fannie Mae and Freddie Mac), play an equally significant role in providing liquidity (and sustaining values) in the market rate apartment market. We should all watch very carefully how Congress and the Administration deals with their future in the coming years.
A TALE OF TWO CITIES
Let me now move from the macro to the submarket level, and let us look at how these trends are playing out in two very active, but also very different, markets in which we are active, downtown Los Angeles and San Francisco.
As has been well documented, downtown Los Angeles rose from decades of slumber over the last 10 years. Staples Center, LA Live and Disney Concert Hall were built, and the residential population of downtown more than doubled. But then we got a little ahead of ourselves. Back in 2005, it seemed like every month, some developer no one had heard of before was announcing a 50 story condo tower. Having built at this scale before, we at Related competed for and won the rights to develop the Grand Avenue project on three city blocks near Disney Hall on Bunker Hill. Irrational exuberance? I plead guilty.
The recession put a stop to most of that activity, as it did virtually everywhere. But not all of it. Last year, over 100 restaurants, bars, clubs and stores opened in downtown LA alone. These will help provide the amenity and entertainment base that is essential to continued growth. And we quietly worked out a deal with Eli Broad to build a world class museum of modern art, to be paid for and endowed by him alone, on one of our sites. And while the financial markets slumbered, we oversaw the design and construction of a new 16 acre civic park, paid for by our land acquisition, which will open next month and be run by the Music Center.
But we never lost sight of the economic potential, and worked with our public agency partners to prepare for the next cycle. We negotiated a deal with the agency formerly known as the CRA, as I like to refer to it, to develop a 20 story mixed income apartment tower with 271 units and restaurant and retail space, adjacent to the new Broad museum, which will open onto a new public plaza funded by the CRA, and being designed by Diller Scofidio, the firm that designed the museum. And we and Broad expect to announce a deal with a noted restaurant operator for two venues, one on the plaza and another in our building, later this year. Construction on our tower should start this fall.
What was to have been our first phase, the block directly opposite Disney Hall on Grand Avenue, which has been on hold, is now being replanned to better reflect the realities of the downtown market. It will still include a mix of hotel, residential, and retail space, but in a slightly less ambitious form. We expect to have a revised plan for discussion by the fall. Stay tuned.
That is hardly the only new activity downtown. There are an additional 2,000-2,500 units of housing under construction or in planning, significant retail activity, especially in the Figueroa corridor, and at least two new hotels moving forward. And this is all prior to the proposed new NFL stadium and convention center expansion.
But while I remain bullish on downtown, I leaven that with a healthy dose of reality and, hopefully, some perspective. We are building a high rise rental project in part because we are sharing parking costs with the Broad garage, and are receiving subsidies to help with our 20% affordable housing requirement. In order to justify new construction of a high rise (concrete) residential rental building elsewhere, assuming market land costs and no subsidies, rents would have to be in the $4.50 per square foot range. That might work in Century City or Santa Monica, but not in downtown. Similarly, to justify the construction of a new condominium tower, sales prices would have to exceed $800 or even $900 per square foot, depending on land and site costs. Units in AEG's Ritz Carlton Tower have sold in that range, but that, like our Grand Avenue hotel/condo proposal, is a unique animal. The office market, on the other hand, has been relatively static, with many rents in Class A buildings still below $30 per square foot NNN, well below the $45-$50 that would be required to justify new construction. The market's affordability relative to the west side offers an opportunity for at least some employment growth there in the near future, particularly as older buildings are repositioned to accommodate the new wave of tenants.
Assuming modest economic growth, rental increases of 3-4 % in apartments over the next 3 years are likely. Construction of new condominiums will follow, aided by the growing base of amenities which will begin to attract empty nesters as well as young move-up professionals and the already significant base of Asian buyers.
It is no longer a secret that San Francisco is the hottest real estate market in the country, fueled by explosive growth in established tech and social media firms. We are processing a 215 unit apartment project in the Potrero Hill neighborhood and working on a high rise mixed use site near the Transbay Terminal downtown, and have been active in the market for many years. Our average rents at the Paramount, a 10 year old building, exceed $4.20 psf, and our retail rents average over $20 psf. Further, most buildings are parked at ratios of less than 1:1, significantly reducing construction costs, and landlords can charge upwards of $250 per month for parking. (In LA, 1.25:1 would be a minimum threshold and each unit would typically get one space at no charge.). When we built the Paramount from 1999-2001, its south of Market St. location was considered pioneering. When we opened the building, rents averaged a little over $3 psf. By 2007, they had risen over $4 psf, only to drop to $3.35 two years later, before increasing again. It is worth noting that the ten year average annual increase in rent has been around 4.5 %, for those of you who follow such things. And office rents South of Market on average now exceed those in the more established North of Market financial district., a reality that would have been unthinkable even five years ago, exceeding $50 psf NNN and encouraging the construction of the first new office buildings in many years.
San Francisco's real estate markets stabilized a couple of years before those in LA. The rental increases occurring in LA now began two years ago in SF. Condo pricing also bottomed out 2-3 years ago, making SF one of the few markets nationally in which construction loans for new condo construction in select locations are available today. A small condo project on Valencia St. in the City's resurgent Mission District recently sold most of its units at prices over $900 psf; in LA, those values exist today only in select precincts on the west side and Santa Monica. The Bay Area also benefits from an extensive and effective system of mass transit, which has begun to create a seamless corridor for housing and jobs between SF and San Jose and, to a lesser extent, between SF and the East Bay. Policy makers in Southern California should take note.
Job growth in the City and neighboring Silicon Valley in technology, social media, and related fields, of course, has fueled this boom, which is occurring on a smaller scale in a swath of west LA from Playa Vista to Santa Monica. This January, we started construction on 158 luxury condos (and 160 affordable apts.) on three City-owned sites on Ocean Boulevard in Santa Monica. Despite lenders' understandable aversion to condos, we were able to obtain a $120 million construction loan from Wells Fargo and HSBC, at a loan to cost of 65%, due to the relative strength of this submarket and extreme barriers to entry for new product. Similarly, office rents are climbing well above $50 psf, encouraging new construction. In fact, Santa Monica "reads" like the SF Bay Area, enjoying strong job growth, good weather, and a challenging entitlement climate.
Will these trends continue?
All of this sounds like a reasonably encouraging story for real estate, at least in coastal California. People will always want to live here, and investors from around the globe, especially Asia, will always view California as a safe haven. We even have a championship team in HOCKEY! But are we planning for the growth that is actually occurring, or just putting our fingers in the wind and hoping things work out?
Consider the following issues, then ask yourself what, if anything, is being done to address them?
(1) Government budgets: Almost two years ago, State Senate majority leader Darrell Steinberg stopped by my office and asked me if I had my druthers, what could the State do to help my business? No doubt expecting me to ask for regulatory relief or funding for affordable housing, he was surprised when I told him to focus first on fixing the State's budget. And that's only one level of the problem: I cannot recall a time in my professional life when EVERY level of government was so financially stressed. Apart from all the obvious problems this presents, why should we in real estate in particular care about it? For starters, someone has to pave the way for growth, by investing in infrastructure, transportation and education. Traditionally, state and local governments have funded these by borrowing in the tax-exempt markets. Today, because of investor trepidation about the ability of many local governments to repay these obligations, tax-exempt interest rates remain 100 to 150 basis points above where by all rights they should be. This mind set has even infected tax-exempt borrowing for private purposes, such as multifamily housing, even though government agencies are merely conduits for issuing bonds in those cases. The taxable and tax-exempt markets have effectively inverted. So, in a vicious cycle, the resultant increase in interest expense further burdens already strapped government budgets. The result? Either projects that are necessary to accommodate growth are postponed, or governments turn elsewhere for help. And where do they inevitably turn? To us, in the development community. Remember fees of $40,000 and $50,000 a unit? Get used to them. And try providing "affordable" housing while you're at it.
(2) Environmental regulation: I have a confession to make. Although I am a real estate developer, I don't reflexively oppose all regulation. Difficult entitlements? Less competition! And some regulation is necessary to protect us from ourselves....but we in California have gone way off the deep end.... Let's start with CEQA, the Calif. Environmental Quality Act. Someone, I believe it was Woody Allen, once described a "quadrisexual" as "someone who will do anything with anyone for a quarter..." (I know you're wondering where I'm going with this...). Well, under CEQA, anyone can challenge virtually any project on virtually any grounds for little more than a quarter. The Governor and several key legislators have indicated a desire to pursue CEQA reform, but "not this year..." So let me suggest what they should do as soon as they can get around to it:
- Time limits on legal challenges: Similar to the legislation passed last year on behalf of AEG's proposed NFL stadium, CEQA plaintiffs should be limited to one bite at the apple; re-filing lawsuits on different issues should not be permitted.
- Limit standing to sue: Standing to sue should be limited to those whose concerns are legitimately environmental. Currently, business competitors and others with an axe to grind against a particular project can hide behind an "unincorporated association." At a minimum, if the plaintiff is listed as "Friends of the Environment," it should be required to disclose exactly who that is.
- Limit scope of challenge to issues of direct impact: Issues such as global warming and urban decay are, in reality, beyond the scope of any reasonable evaluation of virtually all projects. They have become tools to simply stop or delay projects, absent any other substantive argument.
(3) Affordable Housing: As I have discussed, financing is readily available for new apartment construction in well located submarkets, and this will help accommodate growth in white collar employment in the state. But this is not the segment of the State's population in which most of the growth is projected to occur. Rather, most demographers predict that a high percentage of the State's population growth will come from minority communities. And with a stressed system of higher education to prepare young people for higher paying jobs, and continued growth in the lower paying tourism and service industries, there will be an increased demand for affordable rental housing. With the demise of redevelopment, however, which typically provided between $1.0 and $1.5 billion annually for affordable housing development, and the virtual withdrawal of the federal government, there are few resources to pay for it. Whatever your feelings about governmental involvement in housing, let me appeal to your self interest. Absent more resources, proponents of affordable housing and some local governments will turn, again, to the development community, by imposing so-called inclusionary zoning requirements, in which developers of new housing must either build or help pay for affordable units.
Even with the state's budgetary problems, however, there are alternatives. And what I am about to propose will disappoint both affordable housing activists as well as elements of the realtor and homebuilding industries, so I think I'm on to something viable....First, while I do not believe that strict inclusionary zoning programs, in which every building of greater than 20 units or so must include or pay for affordable units, are workable in most cities (San Francisco may be an exception), and they absolutely can't work without a pro-growth planning and land use environment, I do support reasonable inclusionary requirements in master planned communities. It is not plausible to argue that a 300 acre community requesting discretionary zoning approvals which will exponentially increase value can't set aside 10 or 15% of the to-be-built housing units for lower income households. This has been done successfully throughout areas as diverse as San Diego County and the Bay Area, and should be encouraged. Second, the state should enact a version of SB 1220, a bill which nearly passed the legislature in this session which would create a permanent source of funding for affordable housing by charging a $75 document recording fee on real estate transfers. Fees as well as taxes require a 2/3 vote of approval, however, and it fell two votes short of passage.
(4) Redevelopment: Redevelopment as we have known it is dead and it ain't coming back any time soon, at least in a recognizable form. But is this really a problem for the real estate industry? At a macro level, not so much. Market rate housing and commercial development will continue to occur subject to market conditions, and most developers won't notice, or perhaps avoided redevelopment areas in the first place. The problem is the type of development that won't happen. Let me explain this by example. It can be argued that the Mission Bay neighborhood in San Francisco, once 300 acres of unused rail yards, has been the engine that has fueled that City's recent growth. It is today home to a new campus for the UCSF Medical Center and the state's most vibrant biotechnology sector, thousands of units of new, high density housing, of which 30% is affordable, a new light rail line, and adjacent to the new Giants baseball stadium. As UCLA's own Nelson Rising, who oversaw much of this development as CEO of Catellus Development Co., has eloquently described, none of this would have occurred without the use of tax increment financing to fund infrastructure and environmental improvements. The payoff to local government in sales, property and payroll taxes alone has been phenomenal. By contrast, Moffett Field, 70 acres of mostly raw land owned by NASA just east of the 101 Freeway near Mountain View in Silicon Valley, the largest piece of undeveloped land between SF and San Jose, continues to lie fallow, even in today's overheated environment. Planned for 1900 units of high density housing and a couple million feet of office and R & D space, and adjacent to the site where Google is building its world headquarters, it is also a Superfund site and lacking in any basic infrastructure. I understand the challenge because, three years ago, Related and TMG Partners of SF were selected by a University consortium that had leased the property from NASA to act as master developers of the site. The magnitude of the required investment in remediation and infrastructure, however, was too great to encourage private investment without some front end public investment. These are potentially transformational projects, that can help California retain its competitive edge in the health and technology sectors.
I have long stated that redevelopment, or government involvement in general, should only take place for three purposes: 1) affordable housing; 2) infrastructure and environmental remediation; and 3) assistance to communities with high rates of poverty. In each case, the proposed activity cannot, almost by definition, be addressed by the private sector alone. The problem in California, even before the recent budget skirmishes, was that redevelopment had become an entitlement. Almost every community, from Compton to Mission Viejo, had a redevelopment agency, and property tax dollars were often used by one community to lure economic activity from another. Clearly, nothing of consequence will occur in Sacramento this year, absent resolution of the state budget crisis. But policymakers need to find a means of leveraging opportunities like these, wherever they may exist.
(5) Planning for growth: In recent years, there has been a flurry of activity, mostly at the State level, in support of what policymakers like to call Smart Growth. SB 375, authored by Senator Steinberg, actually attempts to steer growth to prevent sprawl, encourage public transit, and encourage the siting of housing near jobs. But nothing is ever easy in California. There is still a large divide in this state on the issues of density and growth.
Representing a common refrain, The author and analyst Joel Kotkin, to whom the LA Times always turns when it wants a quote from someone who is a smart growth skeptic, recently fretted that advocating density is like consigning people to live "like my grandmother did in Brownsville," referring to an inner city neighborhood in Brooklyn. I found that analogy a tad overwrought, but most families, he argues, want a single family home with a yard, and efforts to thwart that goal are doomed to fail. And the California League of Cities, representing local elected officials, while supportive of smart growth in general, tends to oppose ANY efforts by the State to intervene in what it believes should be local land use decisions. These debates continue in Committee meeting rooms and academic institutions.
In the mean time, we fail to accommodate our growing population. My colleague Tony Salazar, a successful developer in his own right, who lives in Whittier, a working- and middle class city that is now predominantly Hispanic, told me that in his community of mostly single family homes (and many others like it), young families are increasingly leaving the state, while others live in garages. There are few alternatives. His point: if current land use patterns of low density persist, we are headed for a cliff. The other side of this coin is that we are likely to experience a return in 5-7 years to a housing market unaffordable to the majority of Californians, a "re-run" of an old California standard.
That said, California has always relied on the real estate industry to spur economic growth. Our industry creates thousands of jobs and revitalizes neighborhoods. We can choose to sit by and watch our partners in government struggle with the challenges of the day or we can embrace our collective responsibility to help formulate creative solutions.
One last thought: Since this is in fact an economic forecasting conference, and in the spirit of last year's speaker, Sam Zell,(who famously in 1990 said "Survive till '95," and three years ago, "Come clean in 2013), I offer the following simplistic prognostication. "Hang in there till '20, and you will make plenty..."
I want to thank the Ziman Center for the opportunity to speak with you today.
UCLA Anderson and UCLA Ziman Center for Real Estate Announce Bren Gift to Launch Next Generation of Real Estate Entrepreneurs
$1.25 million by Peter Bren will create advanced MBA course and Bren Fellows program
LOS ANGELES - Peter Bren, a nationally recognized leader in the real estate and investment advisory industries, has pledged a gift of $1.25 million to the UCLA Ziman Center for Real Estate, a joint center of UCLA Anderson School of Management and UCLA School of Law. The gift will be used to establish the Peter Bren Initiative for Real Estate Entrepreneurial Studies at UCLA. The Initiative will create an advanced case studies course focused on entrepreneurial real estate as a capstone to the MBA real estate concentration and the prestigious Bren Fellows program.
Reflecting Bren's unique entrepreneurial path, the gift will also establish the Bren Fellows program, providing financial support and specialized mentorship for the top graduate students in real estate across all disciplines at UCLA.
"Peter, through his many accomplishments, has always been a role model to the real estate world," said Judy Olian, Dean and John E. Anderson Chair of UCLA Anderson School of Management. "He is now creating a legacy that will benefit young entrepreneurs as they launch their careers and have the opportunity to learn first-hand from trail-blazing leaders."
"In multiple ways, Peter's gift is a real game-changer for the Ziman Center," said Stuart Gabriel, Director of the UCLA Ziman Center for Real Estate. "It provides a unique learning opportunity for some of the nation's brightest and most promising MBA students, it introduces them to very successful real estate entrepreneurs, and it helps solidify UCLA's position among the top university-based real estate programs in the world."
"I have been a Founding Board Member of the UCLA Ziman Center for Real Estate for five years," Bren said. "During that time, I have had numerous conversations with students about their aspirations for a career in real estate. Almost all have said they want to be an entrepreneur - they want to build, develop, acquire, etc. It takes a very unique person to embark on an entrepreneurial career path - it is in your DNA or it's not. Any athletic coach will state that you can't teach speed, but you can coach it to a higher level - speed is in their DNA or it's not. The purpose of this initiative is for prospective entrepreneurs to be coached by the real estate visionaries who have 'changed the game,' who will open their companies to our students to develop case studies, and who will then conduct master classes at Anderson."
The advanced case studies course will include actual leaders involved in each case who will teach the strategic dilemmas they have encountered. Vanguards of the industry representing some of the most high-profile real estate projects worldwide, these entrepreneurs will spend time in the classroom going over their careers, deals, and business philosophies. There they will offer valuable insights into complex transactions, corporate dynamics, and leadership within entrepreneurial real estate. Award-winning UCLA Anderson professor Eric Sussman will lead the course.
The first two real estate CEOs, who will participate in the "case study/master class" program, are:
- Rick Caruso, Caruso Affiliated (retail) - with focus on The Grove and Americana at Brand.
- Sam Zell, Equity Group Investments, LLC (multifamily) - with focus on Equity Residential REIT (EQR)
Bren has been a long-term supporter of the UCLA Ziman Center for Real Estate. He is a founding member of the Ziman Center Board and an active mentor to students who have launched a private, small-scale, real estate investment fund.
Bren is the co-founder and serves as chairman of the board and president of KBS Realty Advisors and its affiliate, KBS Capital Advisors, both nationally recognized real estate investment advisory firms with transactional volume greater than $23 billion. KBS operates numerous institutional and sovereign wealth funds, as well as five non-traded REITs. Mr. Bren oversees all KBS operations including the acquisition and management of individual investments and portfolios of income-producing real estate assets. Prior to his current position as chairman and president of KBS Realty Advisors, he was a former senior partner of Lincoln Property Company and president of Lincoln Property Company, Europe. In addition to the UCLA Ziman Center for Real Estate Founding Board, Mr. Bren is also a member of the Real Estate Roundtable, Washington, DC, which deals with key national policy issues affecting real estate and the overall economy.
About UCLA Anderson School of Management
UCLA Anderson School of Management is among the leading business schools in the world. UCLA Anderson faculty members are globally renowned for their teaching excellence and research in advancing management thinking. UCLA Anderson provides a distinctive approach to management education to more than 1,800 students enrolled in its MBA, Fully-Employed MBA, Executive MBA, Global Executive MBA for Asia Pacific, Global Executive MBA for the Americas, Master of Financial Engineering, doctoral and executive education programs. Combining selective admissions, varied and innovative learning programs, and a world-wide network of 37,000 alumni, UCLA Anderson develops and prepares global leaders. Follow UCLA Anderson on Twitter at http://twitter.com/UCLAAnderson, or Facebook at http://www.facebook.com/uclaanderson.
About the Richard S. Ziman Center for Real Estate at UCLA
The mission of the Richard S. Ziman Center for Real Estate, a joint center of UCLA Anderson School of Management and UCLA School of Law, is to advance thought leadership in the field of real estate by generating influential research, educating the next generation of leaders, and providing meaningful forums for industry professionals and policymakers. Through its various activities and programs, the Center employs an interdisciplinary and global approach to addressing the most critical real estate challenges facing our society today and in the future. For more information about the Center, visit http://www.zimancenter.ucla.edu.
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Spring Board Meeting Recap
The UCLA Ziman Center for Real Estate held its Spring Board Meeting and Program on Thursday, April 12, 2012 at the Annenberg Beach House in Santa Monica. During the board-only portion of the meeting, Board Member Peter Bren was recognized for his $1.2 million gift to the Center to establish the Bren Initiative for Real Estate Entrepreneurial Studies at UCLA. Additionally, Board Member Steve Layton provided a market perspective, followed by a moderated discussion on investment strategy.
During the open program portion of the meeting, Sebastian Edwards, Henry Ford Professor of International Economics at the UCLA Anderson School of Management, delivered an in-depth lecture on the world's economies, with a particular focus on Latin America and Europe. Following Professor Edward's lecture, Dr. Ngee Huat, Former President of GIC Real Estate (Singapore's Sovereign Wealth Fund), delivered an insightful talk on foreign investment and emerging markets.
Michael Milken, Founder and Chairman of the Milken Institute, presented the keynote address. Citing the recent recession, Mr. Milken discussed America's tradition of rising to challenges in the face of adversity. He addressed six areas in particular that provide opportunities for positive change, including energy, housing, entitlements, education, health and immigration. Mr. Milken also spoke about the importance of better allocating resources, including investing in human capital to compete in a global economy.
The day concluded with a sunset reception, which included a celebratory toast to commemorate the Ziman Center's tenth anniversary.
California's Urbanscape: Policy Brief
On February 21, 2012, the UCLA Ziman Center for Real Estate and the UCLA Lewis Center/Luskin School of Public Affairs convened a half-day conference on "California's Urbanscape: A New Paradigm for Redevelopment in the 21st Century." The purpose of the conference was threefold: (1) to describe the California Supreme Court decision in California Redevelopment Association v. Matosantos; (2) to provide varying perspectives on the current state of redevelopment projects and funds especially in Southern California; (3) to identify new ways forward. For more information, download the UCLA CA Urbanscape Policy Brief (pdf).
AREA Career Night Recap
The Anderson Real Estate Association (AREA) held its annual Career Night on Wednesday, March 7, 2012 at the UCLA Anderson School of Management. Career Night enables students to showcase their talents directly to companies. This year, 50 students and 80 company representatives were in attendance. The evening featured a networking reception followed by rotational introductions between students and companies. The keynote address was provided by Ziman Center Board Member Guy Johnson, President of Johnson Capital.
Team Victory for UCLA at the 2012 UNC Real Estate Development Challenge
By Sean Sullivan, UCLA Anderson Class of 2013
On February 23-24, four first-year MBA students represented the UCLA Ziman Center for Real Estate and the UCLA Anderson School of Management at the 2012 UNC Real Estate Challenge case competition in Chapel Hill, North Carolina. Under the alias of "Tower Properties," the team of Rob Banovac, Jon Grobe, Phil Semon, and Sean Sullivan brought home 2nd place out of a field of 12 other business school programs. This year's case centered around 600 acres of developable land due south of the Disney resort and theme park in Orlando, Florida. The site faced several challenges including significant wetlands protection issues, a restrictive local Development Plan, and concerns of cannibalization from Disney's existing resorts and attractions. The case required the team to structure a joint venture with Disney (the landowner) and create a development program that incorporated the tenets of "new urbanism" that would appeal to both resort-goers and local residents. The judges praised UCLA's creative yet realistic plan which included a new outdoors concept store/park, a high-tech learning campus, and a mixed-use retail village. In the final round, UCLA beat out Duke's Fuqua School of Business and Columbia Business School, while narrowly losing the final vote 6-4 to UNC's Kenan-Flagler Business School. This marks the third time in six years that UCLA Anderson has come in 2nd at the UNC Real Estate Challenge.
Dr. Stephen D. Oliner Appointed as Ziman Center 2012/2013 Senior Research Fellow
By Alex Valente, UCLA Anderson FEMBA Class of 2013
On Wednesday, April 25th, 2012, Alex Valente (FEMBA '13) sat down to interview Dr. Stephen D. Oliner at the UCLA Ziman Center for Real Estate. Stephen retired early last year after working at the Federal Reserve Board for 27 years. He is currently a Visiting Scholar at the Ziman Center. On July 1, he will become a Senior Research Fellow in the Ziman Center and a Senior Economist for the Anderson Forecast.
What will your role be at UCLA Anderson?
I'm looking forward to expanding my contribution to the Ziman Center and to coming on board with the Anderson Forecast. I'll participate in the quarterly Anderson Forecast conferences and will likely spend about 6 weeks per year on campus, up from 4 weeks this year. Among my responsibilities in the Ziman Center, I'll contribute a couple of research papers each year to the Center's working paper series and will write quarterly briefs on my research or other topics of current interest involving real estate and the macroeconomy. I look forward to applying the experience I gained at the Fed to my work at Anderson.
Where are you from? What is your background?
I grew up in Indiana until the age of 12, and I have basically been in Washington DC ever since. I attended the University of Virginia as an undergraduate student where I majored in Economics, and I did my graduate studies at the University of Wisconsin where I graduated with a Masters and a Ph.D. in Economics. My Ph.D. thesis was on the effects of tax policy on business investment, and I joined the macro-forecasting group at the Fed in 1984, immediately after graduate school. My responsibilities in that group included the analysis of commercial real estate, which consumed a lot of my time during the bust in that market in the late 1980s and early 1990s. I stayed in that group for nearly 10 years before moving to the part of the Fed that covers corporate finance and household finance. During my entire time at the Fed I was actively involved in work for the FOMC (Federal Open Market Committee), which sets monetary policy in the United States. I attended many FOMC meetings and have first-hand knowledge of both the policy discussions at those meetings and the differences in the leadership styles of Chairman Greenspan and Chairman Bernanke.
What are the differences you saw between Bernanke and Greenspan?
Bernanke is more academic. He was a Professor at Princeton and he strongly encourages open discussion and differing points of view, even at FOMC meetings. In contrast, Greenspan ran an economic consulting firm before his appointment as Chairman. He had more of a corporate management style in which he maintained tighter control over important information and more overtly influenced the outcome of FOMC meetings. Despite these differences in style, they were both great people to work for. Both of them valued the expertise of the Fed's staff, and I always felt they treated me and other staff economists with courtesy and respect.
What do you think about the recent efforts to heal the housing market?
These efforts have been beneficial in some respects, but the overall effect has been disappointing. It was probably unrealistic to expect government policy to stop the tide of foreclosures that resulted from the financial crisis and from the increase in home-ownership among households that lacked adequate financial resources. At this point, I think policy can be most effective by facilitating the inevitable transition of many homes to new owners in a manner that imposes as little burden as possible on the households and neighborhoods affected by these changes. One such program is the government's pilot REO to Rental Initiative, which would sell pools of foreclosed homes to private investors who would be required to convert the property to rental housing.
What else have you been up to since retiring?
In addition to my work with the Ziman Center, I have been consulting for a few hedge funds. I'm mainly helping them to interpret developments in the U.S. economy and have greater insight into Fed policy. I am also working part-time as a Resident Scholar at the American Enterprise Institute (AEI), a think-tank in Washington DC. The core of my work there focuses on essentially the same economic and Fed policy issues as my consulting work for the hedge funds. But AEI also has an active program to analyze housing policy, and I'm planning to contribute to that area as well. Finally, I've been maintaining an active research agenda. One recent project estimates what has happened to land prices in major US cities. I initially became interested in land prices when I was at the Fed because of the implications for banks that had been heavily involved in construction or land development lending. During the real estate bust, many of these loans defaulted, leaving the banks with essentially only land as collateral. When we started doing this research there was no price index for land for a broad set of major cities. We went back to the 1990's and looked at data on land sales from CoStar in more than 20 cities across the US. This is the first time that a national data set has been used to value land. This research should help lenders and investors to judge risk better when developing land.
What were the results?
We found that land prices are much more volatile than the prices of homes or commercial real estate. Since the peak in 2006-07, land prices have decreased more than 50% on average and as much as 75% in some markets. Our results demonstrate that land is a very risky asset.
So it looks like a lot of your post-retirement work blends together?
Yes, a lot of my work ties together and I purposefully have been trying to find the overlap. As an example, over the coming year, I plan to delve into the literature and data on the links between household debt and spending. De-leveraging in the household sector has been a major headwind for the economy, and a key question is how much further this process still has to run. Assessing that issue will be important for the macro outlook and for the prospects for the housing market.
Any final thoughts?
I'm really excited to be here! There is such talented faculty and students at UCLA Anderson and I can't wait to work with them.
Richard S. Ziman Center for Real Estate Celebrates a Decade of Distinction
In 2001, the UCLA Ziman Center for Real Estate was established to advance thought leadership in the field of real estate by generating influential research, educating the next generation of leaders, and providing meaningful forums for industry professionals and policymakers. Through its various activities and programs, the Center employs an interdisciplinary and global approach to addressing the most critical real estate challenges facing our society today and in the future.
The Ziman Center has grown significantly in the last decade. In the graphic (pdf), you will find a listing of our top milestones. In the past ten years, we have created cutting edge research, built dynamic student programs, instituted valuable industry activities and provided meaningful public policy initiatives. Within such a relatively short period of time, the Center has become not only influential here in the Los Angeles area, but throughout the U.S. and beyond.
Real Estate Certificate Program Launched
The real estate certificate program is designed to prepare MBA students at UCLA Anderson for successful careers in the real estate industry. In that regard, the certificate program seeks to provide students with conceptual and market frameworks, business methodologies and skill-sets, and institutional, legal, and regulatory knowledge pertinent to placement in this field. Participating students must fulfill the standard MBA general management requirements, but will also receive additional advanced training in the field of real estate. The certificate requirements will draw from the Ziman Center's curricular offerings and extensive extracurricular activities. For questions about the UCLA Anderson MBA curriculum, please contact Jessica Luchenta, Associate Director of Academic Services.
UCLA Law School Real Estate Law Association Mid-Year Review
By Brandt F. Hollander, UCLA School of Law Class of 2013
This year has been a big one for the Real Estate Law Association (RELA) at the UCLA Law School. Our membership ranks have swelled to nearly double their size from last year. Together with our friends from the Business Law Association (BLA) and the Anderson Real Estate Association (AREA) we've hosted our most successful event series yet. This semester our members participated in a host of events including the Croker Symposium and the ULI fall meeting in Los Angeles, as well as a variety of networking events, happy hours, and industry panels. This semester our lunch time speaker series continued with excellent presentations from: Joe Cilic from Sotheby's Realty, Phil Nichols of Pircher, Nichols & Meeks, Mary Hager from Thackeray Partners, Matt Nesburn from Akin Gump, Phil Feder and Rick Kirkbride from Paul Hastings, and Jay Maddox from Kibel Green. We're excited to continue the series this coming semester. We have a terrific line up of industry luminaries scheduled to make presentations beginning with Walter Sprunt of Aureus Group on January 18th. If you would like more information about Mr. Sprunt's presentation, or to join our mailing list for future events, please contact us at: RELA@Law.UCLA.edu. We look forward to hearing from you and hope to see you at an event soon!
Research Release: Homeownership Rates Could Drop Further After Unsustainable Jump During Last Decade
The drop in the homeownership rate from an all-time high of 69.2 percent in 2004 to 66.4 percent in the first quarter of 2011 reflects a decline from unsustainable levels to something closer to historical averages, according to a study released today by MBA's Research Institute for Housing America (RIHA). While the homeownership rate may have bottomed out, it could fall another one or two percentage points because of tightened credit and other factors, the paper says.
Titled "Homeownership Boom and Bust 2000 to 2009: Where Will the Homeownership Rate Go from Here? (pdf)," the study was conducted by professors Stuart Gabriel of UCLA's Anderson School and Stuart Rosenthal of Syracuse University. They found that the increase in the homeownership rate in the middle of the last decade extended to all age groups but was most pronounced among individuals under age 30. These increases coincided with looser credit conditions that enhanced household access to mortgage credit, along with less risk-averse attitudes toward investment in homeownership. Following the crash, these trends have reversed and homeownership rates have largely reverted to the levels of 2000.
Key findings from the study include:
- A combination of changes in mortgage credit standards and attitudes towards investment in homeownership likely contributed to much of the boom and bust in homeownership over the decade. As credit conditions loosened in the first part of the decade, many people of all ages who would have remained renters instead became homeowners. With the financial crash, the recession, and tighter credit conditions, homeownership rates have fallen back to levels close to those of 2000 for most age groups.
- Changes in the population's socio-demographic composition and economic attributes also served to lower homeownership rates between 2000 and 2009. For all household heads age 20 to 80, demographic-socioeconomic shifts pushed homeownership rates down by roughly 2 additional percentage points over the period. These effects were notably different across demographic groups, however. For example, among individuals 25 to 35 years old, shifts in their demographic-socioeconomic attributes pushed homeownership rates down by nearly 5 percentage points over the 2000-2009 period. For African Americans the analogous value was only roughly 1 percentage point.
- Individuals appear to have been more risk-seeking in their approach to home buying in the first half of the last decade. This changed to a more risk-averse posture following the real estate meltdown.
- Between 2000 and 2009 there was a one percentage point increase in the homeownership rate. But, were it not for the shifts in access to homeownership through easier credit and the changes in socioeconomic conditions, the homeownership rate would have actually fallen between 2000 and 2005, rather than increasing.
The paper relies on individual-level data from the 2000 census and the 2005 and 2009 American Community Surveys (ACS) to assess housing choice and uses 34 control variables to analyze the underlying drivers of homeownership. The paper is divided into three parts: an assessment of the underlying drivers of homeownership, an ex-post analysis of the boom and bust in homeownership during the 2000s, and a discussion of what may lie ahead for U.S. homeownership rates.
Ziman Center Launches Blog: UCLA Real Estate Wire
We are pleased to announce the launch of our blog, "The UCLA Real Estate Wire," or "The Wire." Professor Matthew Kahn, ZC Director of Research, will serve as the faculty lead. The Wire offers readers insights about real estate markets and urban issues from a diverse set of UCLA scholars and friends of the Ziman Center. We expect that faculty and students from the Anderson School of Management, the Economics Department, the Department of Urban Planning and Public Policy and the UCLA School of Law will all contribute. To read our blog, click here: http://blogs.anderson.ucla.edu/zimancenter/.
2011-2012 AREA Programming & Progress
By Blake Thomas, AREA President/UCLA Anderson Class of 2012
2011 has been another year of tremendous growth and optimism for the Anderson Real Estate Association (AREA). We began 2011 with a very successful "Real Estate Career Night" that included both law and management graduate students. The evening was highlighted by a keynote speech from Wayne Brandt, Managing Director and the Western Regional Head of the Real Estate Capital Markets Group at Wells Fargo Bank. In May, Professor Paul Habibi held a sold-out lunch time workshop for the entire student body on a decision all students are facing today, "Whether to Rent or Buy". Most importantly, the internship market last summer was one of the most successful the Ziman Center has seen in recent years, with students taking on a diverse set of opportunities ranging from Private Equity and Development to Brokerage and Entrepreneurship. Many of the students took positions at firms with strong ties to the Ziman Center and its Board members.
The incoming first year class looks to be as strong a class as we've seen in recent years. The number of students interested in pursuing a full time career is trending upward, and they are coming in with even stronger backgrounds in the industry than the previous years. UCLA prevailed over USC once again in the Annual SoCal NAIOP Real Estate Challenge under the leadership of Professor Habibi. Michael Johnson (MBA), Robert Wilshusen (MBA), John Shishido (MBA), Blake Thomas (MBA), and Adam Rude (M.Arch.) brought home the silver shovel to ties the record at 7-7 with their proposal for "The Village at Anaheim Colony", a thoughtful, market-appropriate and integrated mixed-use development.
Leveraging the resources at the Ziman Center, AREA held a number of successful networking events and educational workshops. Over the summer, AREA and the Real Estate Alumni Group (REAG) picked up the tab for a alumni-student mixer at Pink Taco. Professors Habibi and Sussman entertained the students with their annual presentation on opportunities available at Anderson. A Career Panel with David Milestone of Eastdil Secured, Varun Pathria of Colony Capital, and Chris Isola of CBRE provided students with some insights on the long-term opportunities available in the industry. Additionally, students heard from Matt Schwab of Karlin Real Estate about the world of distressed debt. Both Paul Rutter and Jeff Worthe graciously hosted dinners for eight. Finally, in conjunction with Madison Partners' Brad Feld, AREA hosted it's first LA Bus Tour that took students through various westside submarkets and discussed major capital events, owners, tenants and fundamental drivers.
This coming year, students are looking forward to Days on the Job at Arch Bay Capital and perhaps another one up in San Francisco with Tod Spieker, amongst other target firms. Training workshops on both ARGUS and Excel modeling are planned. And we plan to perform some community outreach efforts, and join forces with Anderson's Net Impact by volunteering at Habitat for Humanity.
The partnership between the Ziman Center and Anderson continues to be a success one. Students are given the resources and opportunities to advance their careers, and become leaders in redefining the Real Estate industry.
California's Urbanscape: A New Paradigm for Redevelopment in the 21st Century
February 21, 2012 - Covel Commons, UCLA
California's redevelopment agencies have long relied on tax increment financing to improve communities and neighborhoods. Recent efforts by Governor Jerry Brown to eliminate redevelopment agencies in order to balance the state budget have resulted in legal actions that have left the future of redevelopment efforts uncertain. In light of the recent California Supreme Court decision upholding the State's right to eliminate redevelopment agencies, and striking down a compromise measure that would have allowed redevelopment agencies to continue under a revenue-sharing agreement, this conference will bring together participants from research and practice to discuss the current state and future of redevelopment in California. For program and registration information, see the UCLA Ziman Center & UCLA Lewis Center Urbanscape webpage.